In early January 2023, the then minister of Micro Small and Medium Enterprises, Narayan Rane, launched the MSME formalisation project with the Small Industries Development Bank of India or SIDBI.
SIDBI states, “The principal objective of the MSME Formalisation project is to provide Udyam Registration to the large number of Informal Micro Enterprises (IMEs) not registered with GST [Goods and Services Tax] authorities.”
While these interventions, the Udyam platform or registration under the GST are not a problem in themselves they come at the cost of a systematic understanding of the complex push-and-pull between informal and formal that mark the everyday workings of micro enterprises.
These interventions underemphasise the concerns of labour formalisation, capital, everyday challenges and the resilience of enterprises in face of adversity.
In recent times all conversations on MSMEs have focused singularly on the question of registration. The data on MSMEs reported by the government has largely relied on Udyam and GST as well. This approach carries the risk of thinking that the formal and informal categories are static.
The reality, as the data below will show, is far from this. Stress on registration has also removed emphasis from the question of who benefits from formalisation and how.
In the everyday, practices of informality transcend the official status of a formally registered enterprise. These practices include transactions that are outside the books of accounts, capital sought from informal sources, employing workers informally, and tension with local zoning, by-laws and adherence to safety standards. These can crop up despite an enterprise being formally registered.
Neither of these are less important than the other if the idea is for micro, small and medium enterprises and the workers employed within them to flourish. As per the 73rd round NSS’s data on survey of unincorporated enterprises conducted in 2016, 45% of those with an annual revenue of 25 to 50 lakhs per annum were registered under the Value Added Tax (VAT) regime but 65% of their employees are informally employed.
While 24% of them borrowed from formal sources 1.54% of them were registered under the Provident Fund Act.
In the top tier of micro enterprises, for enterprises that clocked an annual revenue of Rs 3-5 crores, 73% were registered for VAT, but 70% of the total workers employed were done so informally. While 42% of them borrowed formally, less than 9% were registered under the Provident Fund Act. Borrowing from formal sources goes up by four times among those who clock revenue of under Rs 12 lakhs compared to those who clock a revenue of Rs 3-5 crores, and proportion of employees informally employed goes up from 46% to 59%, likewise.
I report figures on VAT since it was the predecessor of GST at the time at which the survey was conducted.
Registration and revenue have a direct and a strong relationship with borrowings. For instance, the number of enterprises borrowing capital goes up by four times for those with annual revenue of less than Rs 12 lakhs per annum versus enterprises on the top end of the micro category clocking revenue of Rs 3-5 crores per annum. A sharper increase is observed in average borrowings. Rs 1 lakh for enterprises of revenue of Rs 12 lakhs to Rs 11 lakhs for those in the range of Rs 50 lakhs to Rs 1 crore and Rs 5.8 crores for enterprises with annual revenue of Rs 3-5 crores.
Also read: The MSME Sector Needs More Than Just the Udyam Registration Scheme
When it comes to workers and the nature of their employment this linear relationship is not of the same degree.
For enterprises at the lowest end of the micro category, who are clocking a revenue of less than Rs 12 lakhs per annum, 56% of their workers are employed informally. This is after dropping Own Account Enterprises from the analysis.
For enterprises clocking Rs 25 to 50 lakhs about 65% of the total workers are informally employed. With the rise in revenue this pattern does not change much in degree or direction. For enterprises clocking between Rs 1 and 5 crore, about 68% of workers are informally employed. In the case of micro enterprises, the disproportion of informal workers to total workers is often the result of the rise in total number of workers employed by enterprises with higher revenues.
But the pattern is opposite in the case of enterprises with similar revenues covered under the Annual Survey of Industries (ASI), 2016. Those registered under the Factories Act, 1948, are covered by the ASI, which has a more defined set of regulations.
For those enterprises earning under Rs 12 lakhs and registered under the Factories Act, 1948, about 58% of the workers are contractually employed. In the case of enterprises with revenue of Rs 25 to 50 lakhs per annum this number drop to 50% and for those between Rs 1 and 5 crore revenue, it is about 45%. I use the term ‘contractual’ and not ‘informal to adhere to the term ASI uses.
While the direction of relationship between the size of enterprise and formal nature of employment is opposite to the NSS it is important to note that even for the largest of enterprises within the micro category who are registered under the Factories Act, 1948, majority of their workforce, that is 55%, is informally employed.
‘ Stress on registration has also removed emphasis from the question of who benefits from formalisation and how.’ Photo: ILO/Flickr ATTRIBUTION-NONCOMMERCIAL-NODERIVS 2.0 GENERIC
The ASI survey reports that 87% of the unincorporated non-agricultural enterprises in the country during 2015-16 operated out of a fixed location. Of this, 44% operated from within households and a similar number from from outside the household. However about half of the Own Account Enterprises were operating out of the premises of their own households, while 14% of enterprises operate out of temporary structures and 44% operate from within the household.
Premises of registration and operation are among key information which is needed to reach and regulate enterprises. But as seen above, there is a mosaic of arrangements out of which majority of enterprises operate. Often our proclivity is to classify these arrangements as illegal instead of understanding the complexity of being informal on an everyday basis. Assuming that fixing registration and digitising accounts will fix all these, without measuring them simultaneously is perilous.
There are yet another set of tensions surrounding formality around local by-laws of zoning, construction and safety. These include a range of tensions such as vendors violating zoning laws to larger enterprises violating safety and environmental standards.
A multi-pronged approach is needed to understand and categorise enterprises on the degree of their informality across four parameters:
- extent and nature of registration as an enterprise,
- extent and nature of capital deployed,
- nature of worker contracts, and finally,
- adherence to safety and by-laws and other tensions with legality.
With the rise of Own Account Enterprises and newer models of capital labour arrangements as in the case of gig and platform workers, it is necessary to not wish to do away with informality but to understand its characteristics, its compulsions and thereby identify pathways that are context friendly, and which aid the transition to formal – in terms of mainstreaming opportunities for these enterprises.
Underlying any intervention to formalise must be a clarity of intent.
The condition of enterprises and labour employed within those enterprises needs to be systematically and consistently tracked, and tested, which is not occurring at the moment. We are tracking Udyam registrations and GST collections more than we are tracking the nature of contracts of labour, nature of capital and other compliances.
Kinjal Sampat is a senior researcher with the Indian Institute of Human Settlements.
